British Virgin Islands’ Minister of Finance believes that competition and the dictates of the global tax transparency agenda continue to have a negative impact on the territory’s principal money earner – financial services.

The significance of this activity cannot be overstated as its contribution to government earnings is estimated at 93.7%.

Finance Minister Orlando Smith is right to be concerned because the close of 2013 saw the BVI blacklisted by France amid a storm of controversy about that territory’s ability to effectively fulfil its treaty obligations to France under their 2010 Tax Information Exchange Agreement. More here.

BVI’s competitiors for business – Jersey and Bermuda – were also blacklisted by France but received a much welcomed ‘gift’ as they were removed from the list days before Christmas.

Despite assurances by Finance Minister Smith that France is satisfied with the process it has in place to deal with information requests under the treaty, so far no such indication has been given by France.

As a result, investors with assets in the BVI remain exposed to the application by France of a 75 percent withholding tax.

It is little wonder then that in his January 14, 2014 Budget Speech Minister Smith referred to the territory’s International Tax Authority, which he said has “made significant inroads in the management and fulfilment of the BVI’s international tax obligations.” He went on to say that he expects the unit to produce a “paradigm shift in the manner in which the BVI deals with its international tax obligations.” More here.

Of course you already know this but for a recent illustration please read on.

The Tax Information Exchange Agreement (TIEA) between the Cayman Islands and Australia is not retrospective and only applies to tax periods beginning on July 1, 2010 going forward. This is understandable of course because not only would it be against the spirit of international treaties it would be unfair to taxpayers in both countries.

International tax co-operation based on newly forged treaty relations, and absent a culture of information sharing is largely a forward-looking exercise.

The majority of the eight hundred (800) OECD-styled TIEAs now in place are of very recent vintage, with most, less than four years old. Little wonder therefore that they are useless in providing confidential tax payer information ‘on request’ for tax periods prior to the date to which the TIEA applies.

Despite the frenzied TIEA activity by most members of the OECD Global Forum on Transparency and Exchange of Information for tax Purposes over the last four years, largely fueled by threat of economic sanction by the world’s wealthiest countries, few cover tax periods before 2010.

Indeed, this is precisely the case with the Cayman Islands-Australia TIEA and why according to Professor Miranda Stewart, of the Melbourne Law School, the OECD is reviewing whether the domestic laws of TIEA signatories are impeding information exchange.

A Quick Aside

That the OECD would attempt to cast judgement on the domestic laws of a TIEA-signatory and in the process supplant the lawful rulings of the judiciary in either party is another matter which deserves separate consideration in another post.

Suffice it say however that, like all treaties TIEA interpretation is a matter left to the parties to the agreement and the Vienna Convention on the Law of Treaties. Aside from the ready availability of the G-20 as its enforcement arm one cannot imagine how the OECD could assert any jurisdiction over an international contract to which it is not a party.

Back to the case.

Justice Charles Quin of the Cayman Islands Grand Court recently ruled that it was illegal for the Cayman Islands Tax Information Authority to hand over documents about two companies registered in the islands to the Australian Tax Office (ATO). The Cayman Justice decided that the tax authourity was barred from doing this even though the companies – MH Investments and JA Investments – are linked to Australian businessman Vanda Gould who has been charged with tax and money-laundering.

What’s the problem?

The TIEA only applies to tax periods beginning on July 01, 2010, but the case against the two Cayman Islands companies relates to the years from 2000 to 2007.

Interestingly however, this ruling did not prevent Australian Judge Nye Perram from allowing the documents unlawfully obtained by the ATO for use in its USD40m Federal Court case despite a request by Justice Quinn that the documents be returned or destroyed.

A Question of Workablity

Now fresh questions have been raised about the utility of perfectly sound legal instruments which are based on a well established rule of international tax treaty law that treaty obligations between countries apply from the date agreed to by the parties.

The fact that building a case involving the proving of tax fraud, evasion or other criminality may require access to tax information several years predating the agreement and involving companies connected to the principal defendant does not, as a matter of law, call into question the validity of the instrument.

That TIEAs may be unhelpful in some, or perhaps even in the majority of cases involving tax malfeasance before 2009, is not a mark against these agreements or the bona fides of the signatories thereto.

Rather it merely illustrates the point that international tax co-operation is a relationship between tax authourities which does not begin or end with the inking of a model agreement.

Expressing its customary surprise and outrage at the territory’s inclusion in France’s latest tax haven blacklist, Bermuda has argued the following lines of defense:

It has an existing tax information exchange agreement (TIEA) exchange with France, one of 39 bilateral transparency agreements Bermuda has, including with 90 percent of the G20 countries.

It is also vice chair of the steering group for the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.

It anticipates the completion of all of its internal processes for automatic exchange of information instruments such as US and UK FATCA IGA Model 2 and the Multilateral Convention will be by the end of September 2013.

It has stated publicly that it supports the proposed G5/EU multilateral pilot based on US FATCA and will sign-on when the multilateral exchange of information pilot is ready for adoption.

It is recognized as complying with the highest international standards on tax transparency and compliance.

It recently underwent a combined Phase 1 and Phase 2 OECD assessment which was very positive and determined that the Territory not only has the legislative procedures in place but has an active exchange of information regime in place with its tax treaty partners.”

Automatic Exchange of Information (AIE) is the systematic, periodic transmission of bulk confidential taxpayer information by authorities of one country to the country where the taxpayer, whose information is being transmitted, is resident. The other state being the source (of the income) state. These transmissions cover various types of income, including dividends, royalties, salaries and pensions. It also covers other ‘useful’ information such as changes in the taxpayer’s residence, the sale and purchase of land and VAT refunds. This allows the tax authourity to calculate a taxpayer’s net worth and if he had the income to support any foreign purchases, evidence of which would be included in the bulk transmissions. http://www.oecd.org/ctp/exchange-of-tax-information/automaticexchangeofinformationreport.htm

AIE does not rely on a ‘request’ for information by a tax authourity . It does not rely on a treaty, although Article 26 of the OECD Model Tax Convention, now reflected in just about all tax treaties negotiated since 2009, can provide a treaty basis for AIE, if necessary. Furthermore, there is no need for the information requested to be ‘foreseeably relevant’, and so there is no litmus test to guard against ‘fishing expeditions’ by revenue authourites. Of course, I suppose that any automated ‘bulk’ transmission of information is, by its nature, a routine and periodic exercise in ‘fishing’.

The OECD also however, recognises that AIE is currently the practice of many OECD and non-OECD countries and has also expressed the hope that more countries would move in this direction.

For his part, G8 Chairman UK PM David Cameron has however made it plain that the central plank of his G8TTT agenda is the global application of AIE. Except to say that it is inadequate, and insufficient to tackle tax evasion, 800 TIEAs later, reference to the current ‘on request’ standard set out in these and appropriated worded tax treaties, has, in the lead up to the G8 summit, be given only passing reference by way of criticism.

The gargantuan effort and immense political currency expended by OFCs on becoming ‘substantially compliant’ with the ‘on request’ standard with which its creators are no longer enamoured begs the question, why should these members of the GF continue to sign TIEAs, knowing that FATCA and AIE require the same type of legal and regulatory frameworks for either to be workable. As such, because FATCA is now in force, though its effective date for implementation looks to be 2015 by which time AIE will likely be the new global standard, why not get cracking on this early. Surely 800 TIEAs plus over 2,000 tax treaties in force with modern information exchange provisions is a sufficiently dense network. See more here:http://franhendy.com/2013/06/02/are-tieas-past-their-sell-by-date/

FATCA implementation is going to be expensive, very expensive, so much so that the US is even thinking of ways to provide financial support to the countries that will need it to implement FATCA through intergovernmental agreements. Moreover, the OECD has already announced plans to work with the US to provide an electronic portal to enable FATCA implementation. This makes perfect sense as this platform could also serve as the prototype for a global AIE. For more on FATCA click here:http://franhendy.com//?s=10+fast+facts+about+FATCA&search=Go

Except the fear of being labelled a ‘non-compliant tax haven’ by the G20 for failure to pass assessments on the policy and practice of tax formation exchange, principally through the conclusion of TIEAs, why should countries care to progress the OECD’s TIEA work programme at all when the OECD is just waiting on a definitive signal from the G8 this month and perhaps another from the G20 next month, that automaticity is the new and, presumably improved, global standard information exchange. This is especially pertinent since compliance with former standards provide no immunity from mis- characterisation, public derision and penalty.

This ‘flip-flop ‘methodology and its insistence that ‘substantial compliance’ must be achieved within unrealistic timelines, is at the heart of the criticisms of the OECD by non-members, particularly in the area of transparency and exchange of information. Non-OECD members of the GF who in good faith, albeit energised by the spectre of the G20 ‘sword of Damocles’, have been working assiduously since 2009 to’ score points’ with the anti-tax haven lobby, have perhaps now realised that all that they have really done is to score a ‘collective’ own goal.

Forgetting for the moment, and yes I know it is near impossible, strictly speaking, if according to the research findings of Professor James Stewart, from Dublin’s Trinity college, companies in Ireland paid tax of 4.2% on more than $100bn of net profits in 2008, that, I am afraid is proof positive.

Before getting defensive; which is perfectly understandable after hearing the U.S Senate refer to you by what the rest of the world calls the State of Delaware, that is, a tax haven, consider this.

You along with the Netherlands and Luxembourg, have been named among the six countries which account for 60% of all global US profits; and your present rate of corporate income tax is a paltry 12.5%, which is markedly lower than the average tax rates worldwide which hover between 20% to 35%.

To be clear, I have no quarrel with competitive tax rates once buttressed by a legal and regulatory regime that supports and fosters sensible and effective rules on transparency; and the sharing of confidential taxpayer information, in accordance with agreed disciplines.

I am the first to admit that numbers alone do not tell the whole story; so what else has the OECD Global Forum (GF) concluded about Ireland?

Ireland’s peers in the GF, including the U.S, adopted a 2011 report on Ireland’s Combined Phase 1 and 2 Assessment of the laws and rules which give effect to the global standards on information exchange. It concluded that among other things Ireland ensures that:

ownership and identity information for all relevant entities and arrangements is available to their competent authourities;

reliable accounting records are kept for all relevant entities and arrangements;

banking information is available for all account holders; and

its exchange of information mechanisms covers all relevant partners.

This is the finding of the body mandated by the G-20 in 2009 to expose the world’s tax havens, based on their inability to pass their Phase 1 and 2 assessments conducted by the Peer Review Group of the GF. Recall that even before undergoing this detailed examination of its regime, Ireland was ‘whitelisted’ and deemed largely compliant when measured against parameters designed to exclude countries from the list of tax havens.

How then is it that the U.S Senate, in discussing the corporate, and in particular, the tax saving activities of Apple concluded that Ireland, despite its stellar credentials, is a tax haven.

In fact, the only tax haven referred to in this document is Nauru, still regarded as a jurisdiction, though committed to the internationally agreed tax standard, has yet to substantially implement it.

It would seem therefore, that according to the creators of the term ‘tax haven’, by every agreed measure, Ireland is not a tax haven, along with over a hundred others included on the 2012 whitelist.

So why this persistent bother about ‘tax havens’.

Here’s the reason.

Despite protestations to the contrary, it does not matter what metric is used or conclusions reached about the definition of tax haven by countries, as a matter of international law, that it to say, what states have said in global fora about tax havens and their characteristics. When as a matter of domestic law, practice and inclination, a tax haven is defined not only by reference to whether a country is sufficiently transparent, or exchanges tax information ‘on request’. Instead what remains as the defining feature of a ‘tax haven’, is its low and competitive corporate income tax rate.

To be precise, it is not just this type of tax competition that gives rise to this label; it is also the success of the country engaged in it that will, ten times out of ten, result in the appellation, tax haven.

The bottom line is, so long as your country’s tax rate is in the single or low double digits and you are attracting customers interested not only in the tax rate, because clearly this must be backed up by highly specialised local expertise, then, I am afraid, as far as the countries who are losing their taxpayers to you, are concerned, and even if it is because their tax systems are in need of a overhaul, you are a tax haven.

That said, it is far better to be just a tax haven than an uncooperative tax haven.

In closing, let me also say that it is right and proper to explain what type of tax haven you are as many other tax havens have and continue to do, but if this machinery is activated only at the whisper of ‘tax haven’ and rendered immobile when opportunities arise to reinforce the legitimacy and imperative of responsible tax competition, then let me congratulate you in advance for your enviable accumulation of frequent flier miles.

In the absence of a global body to manage the international tax agenda – and no, the OECD, even if backed by the G-20 does not count – can the WTO fill the void?

The WTO is after all a proper, truly representative organisation styled after the one-country-one vote fashion that, despite the shortcomings of this United Nations model, still represents democracy in action.

Why ask the question in the first place when the WTO deals exclusively with trade related matters in both goods and services? The simple reason is that tax and trade are two sides of the same coin. Without trade there is not much to tax, and without tax, competitive tax that is, there is not much by way of trade in financial services.

It’s not surprising therefore that Panama, like the EU and the US before it, has sought to trigger the WTO’s dispute settlement mechanism to address a matter of concern not only to this prominent Central American financial centre, but one that plagues a number of WTO member states also heavily invested in trade in financial services.

After consultations failed to resolve the issue earlier this year, on May 13th, Panama formally requested the creation of a Dispute Settlement Panel to determine, among other things, whether Argentina’s tax haven blacklist is contrary to the WTO agreement because this very common form of tax discrimination, “impairs the conditions of competition between like services and foreign suppliers of like services, by according less favourable treatment to the services and service suppliers of the listed countries, in a manner inconsistent with GATS Article II:1.”

Like many other domestic blacklists, Argentina’s makes the export of financial services from listed countries more expensive, and by extension less attractive, than exports from countries, not included on the blacklist, because of the 35% profits tax per transaction imposed on Argentines conducting trade with blacklisted countries. This according to Panama’s brief amounts to discrimination of a kind not allowed by the WTO.

The fact that just over two weeks after Panama made its request for the constitution of a Dispute Settlement Panel, Argentina repealed the offending blacklist, which it maintained for 13 years, does not affect the validity of the suit.In fact, the dispute is even more relevant because the replacement list is framed as a positive listing which, by the exclusion of some countries, still gives rise to tax discrimination.

Ultimately, the question that Panama is asking the WTO to resolve is whether tax measures applied by some WTO members to other blacklisted members distort trade by deliberately affecting the profitability of those entities involved in that trade, in this case financial services, and as a result contravene the anti-discriminatory rules of international trade law.

Could the much maligned WTO undo with one decision what the membership of that other ‘pretend’ international body has spent the last twenty years building?